Do Not Chase This Big Rally in Twitter Stock Above $50

Over the past few months, shares of Twitter (NYSE:TWTR) caught fire, with TWTR stock soaring to its highest levels since 2015 on the back of abundant optimism that the novel coronavirus pandemic permanently accelerated the shift of consumer engagement and digital ad dollars into the digital channel.

Twitter (TWTR) app being shown on a phone screen held in a person's hand.
Source: Worawee Meepian / Shutterstock.com

This optimism is not misplaced.

Covid-19 has done just that. Today, we are all more addicted to our phones, computers and social media platforms than ever before. This is not temporary. It’s a permanent shift toward a “digi-everything” society where, if it can be digitized without significant loss of quality, it will be digitized. The reason for this is digital experiences almost always offer superior convenience.

But this optimism is overstated.

TWTR stock has rushed to unsustainably high levels that are not supported by the fundamentals. The platform has had trouble monetizing its users for years. Eventually, this red-hot rally will run into a brick wall called reality. And then Twitter stock will collapse back toward the $30 level.

The Digital Ad Boom

Snap (NYSE:SNAP) just reported blockbuster third-quarter numbers which breezed past user, revenue and profit expectations. Those numbers broadly underscored that we are in the midst of a digital ad boom, the likes of which should boost all digital ad stocks – TWTR stock included.

Here’s the story. The Covid-19 pandemic brought the global economy to a screeching halt at the end of the first quarter of 2020. With the economy not moving, companies stopped advertising. But, we adjusted to living with the virus, and economic activity rebounded. As economic activity rebounded, companies put ad dollars back to work because consumers are spending again.

Yet, consumers’ Covid-19 adjustment include living a more “digital” life – i.e. consumers are spending more time than ever on social media platforms. So these ad dollars that are going skipping the TV, radio and billboard ads, and instead rushing at breakneck speeds into digital channels.

The result is perfect for social media platforms. They are broadly benefiting from a simultaneous rise in engagement (because of Covid-19 restrictions) and advertiser demand (because of rebounding consumer spending).

The market thinks that this rising tide will lift all boats. When Snap reported blowout earnings, all digital ad stocks rose. But I think this rising tide will actually leave out one boat – Twitter.

Twitter Has Money Problems

Zooming out, Twitter has had trouble monetizing its user base for several years, and therefore, not participated in the enormous revenue growth in the digital ad industry.

Over the past five years, Alphabet‘s (NASDAQ:GOOG,NASDAQ:GOOGL) revenue climbed 120% and Facebook‘s (NASDAQ:FB) revenue rose320%. Over that same stretch, Twitter’s revenue increased less than 50%.

The painful reality here is that Twitter and ads just don’t mix well. Twitter is a text-heavy platform in a digital world dominated by visual ads.

As the old saying goes, a picture paints a thousand words. That’s why visual ads are more stimulating, engaging and effective than text ads. It’s also why all of today’s fastest growing digital ad platforms – Snap, Pinterest (NYSE:PINS), YouTube, TikTok, and Instagram – are visual-heavy.

Twitter’s platform is built on 180 character text messages. It’s much harder to seamlessly integrate a compelling ad in a feed of tweets than full-screen, short-form TikTok videos.

That’s why digital advertisers mostly ignore Twitter. Being text-based is part of Twitter’s DNA. It is what makes Twitter, Twitter. But it’s also what will keep advertisers at bay. Thus, for the foreseeable future, Twitter will have money problems.

Unfortunately, it seems the market has forgotten this fundamental problem over the past few months, leaving TWTR stock stuck in significantly overvalued territory.

The Valuation Is Unsustainable

Above $50, Twitter stock is unsustainably overvalued. Of the big four publicly traded social media platforms – Twitter, Facebook, Snap and Pinterest – Twitter is the slowest growing in terms of revenue growth. Its revenue grew just 14% last year (versus 25%-plus growth at Facebook, Snap and Pinterest).

Yet, based on 2025 earnings estimates, Twitter stock is the second most richly valued in the group, at 21-times 2025 earnings estimates. That represents a 5% premium to Snap’s 2025 earnings multiple (who is growing revenue four times as fast as Twitter), and a 40% premium to Facebook’s earnings multiple (who is growing revenue about two times as fast as Twitter).

Pinterest is the only more richly valued social media stock, and that company is growing revenue at a 50%-plus clip.

Clearly, relative to peers, TWTR stock is just wildly overvalued.

That’s also true relative to the company’s long-term growth prospects. Consensus Wall Street estimates peg Twitter’s revenues in 2029 at $7 billion. I think that number will look more like $10 billion by 2030. Still, my numbers say that won’t produce more than $3.50 in earnings per share in 2030, which equates to a fair value for TWTR stock today of just $34.

Thus, up above $50, Twitter stock is trading on hype and fairy dust. Eventually, that hype and fairy dust will disappear.

Bottom Line on TWTR Stock

I’m arguably one of the most bullish analysts in the world when it comes to digital ad stocks. Back at the height of pandemic hysteria, I told readers to buy digital ad stocks with both hands for a huge second-half rebound in digital ad spending. I’ve stuck with that bullish call all year long, as many of these stocks have risen 100% or more.

But – even as a major bull on digital advertising – I’m bearish on TWTR stock.

The painful reality is that the rising tide of digital advertising is not lifting all boats, and one of the boats being left behind is text-heavy Twitter.

That’s not to say Twitter is a bad business. It’s a great platform, with a decent business. But it is to say that Twitter stock doesn’t deserve a $50 price tag. So don’t chase the stock up here. Instead, fade the rally. The next big move could be a plunge back to $30.

On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

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Article printed from InvestorPlace Media, https://investorplace.com/2020/10/twtr-stock-do-not-chase-twitter-rally-above-50/.

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